The Budget 2005

• Introduction

• Personal tax

• Employment issues

• Corporate & Business Tax

• Capital taxes and Trusts

• Stamp duty land tax

• VAT, Excise & other duties

Capital Taxes

Capital gains tax (CGT) annual exemption

The annual exemption for 2005/06 is £8,500. For most trusts the exempt limit is increased to £4,250.

CGT rates of tax

For individuals capital gains continue to be treated as the top slice of income. For 2005/06 rates continue to be aligned with those applying to savings income. Tapered gains are charged at 10% where gains plus total income do not exceed £2,090; 20% between £2,091 and £32,400; and 40% on any balance.

For trustees the rate of CGT was increased from 34% to 40% in April 2004. The 40% rate continues to apply in 2005/06.

Inheritance tax (IHT) threshold

The IHT nil rate band is increased to £275,000 with effect from 6 April 2005. The Chancellor has announced that the band will rise to £285,000 in 2006 and to £300,000 in 2007.

Comment
It is disappointing that no attempt was made to increase the nil rate band to reflect recent rises in the housing market. The family home remains the main asset in many estates and some IHT planning should be considered if the value of the estate exceeds the nil rate band.

Trusts

Following the increase in the rate of tax on the income and capital gains of trusts from 34% to 40% in April 2004, a further package of measures was considered to modernise the tax system for trusts. Budget 2005 has confirmed the introduction of two of these as follows:

• a standard rate band of £500 is being introduced with effect from 6 April 2005 for all trusts paying tax at the ‘rate applicable to trusts’, so that around 25,000 trusts with small amounts of taxed income will have no further liability and will no longer have to submit a self assessment return every year

• new rules backdated to 6 April 2004 are being introduced so that trusts set up for the most vulnerable, for example, for the disabled, are taxed as if the beneficiary had received the income and gains directly.

Comment
Other proposals for trusts are still being considered and after a further consultation process are to be included in the 2006 Finance Bill.

Capital gains and residence

A new measure has been introduced with effect from 16 March 2005 to ensure that individuals or trustees of settlements cannot exploit any double taxation agreements (DTAs) to avoid being within the charge to UK tax in respect of chargeable gains.

Comment
The measure is designed to prevent individuals and trustees benefiting from a nil or small liability overseas in respect of a gain where the terms of the relevant DTA prevent the UK from taxing the gain.

In addition an anti-avoidance measure has been introduced amending the rules that determine where certain assets are located for capital gains purposes.

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Disclaimer - for information of users
This summary is published for the information of clients. It provides only an overview of the main proposals announced by the Chancellor of the Exchequer in his Budget Statement, and no action should be taken without seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.